Sept. 30 (Bloomberg) -- U.S. stocks slid, paring a
quarterly gain for the Standard & Poor’s 500 Index, as a
stalemate over the federal budget sent the government toward a
potential shutdown at midnight.

The S&P 500 fell 0.6 percent to 1,681.55 at 4 p.m. in New
York. The benchmark gauge added 3 percent for the month, giving
it a quarterly gain of 4.7 percent, as the Federal Reserve kept
its $85 billion of monthly bond-buying. The Dow Jones Industrial
Average lost 128.57 points, or 0.8 percent, to 15,129.67 today.
About 6.3 billion shares changed hands on U.S. exchanges, 8.7
percent above the three-month average.

“We are at the mercy of whatever develops in Washington,”
Michael James, a Los Angeles-based managing director of equity
trading at Wedbush Securities Inc., said in an interview. “An
attempt to prevent a shutdown is not totally unexpected, but
some agreement will be better than none.”

U.S. lawmakers have to approve emergency legislation by
midnight to keep the federal government operating from tomorrow,
the beginning of the 2014 fiscal year. Failure to do so may
result in as many as 800,000 federal employees being placed on
temporary unpaid leave.

Republicans and Democrats remained at odds over whether to
tie any changes to President Barack Obama’s Affordable Care Act
to a short-term extension of government funding. The Senate
voted 54-46 to reject the House’s latest plan, in a party-line
move that puts the pressure back on House Republicans.

Essential Operations

In a government shutdown, essential operations and programs
with dedicated funding would continue. The Treasury will sell
debt, while economic reports from the Commerce Department will
be suspended and the Bureau of Labor Statistics will stop
operations. Commerce is scheduled to release data this week on
construction spending and factory orders before the Labor
Department’s closely watched jobs report on Oct. 4.

The S&P 500 fell 1.1 percent last week, its first weekly
drop since August, amid concern the budget impasse will hurt the
economy. A shutdown would reduce fourth-quarter economic growth
by as much as 1.4 percentage points depending on its duration,
according to economists. Three rounds of Fed stimulus and
better-than-forecast corporate earnings have pushed the S&P 500
up 149 percent from a March 2009 low.

Debt Ceiling

In addition to battling over the budget, U.S. lawmakers
face another fiscal dispute over raising the $16.7 trillion debt
ceiling. The Treasury has said measures to avoid exceeding the
limit will be exhausted on Oct. 17.

The debt limit is a bigger problem than a federal shutdown,
though the U.S. will probably avoid both, Moody’s Investors
Service said in a report today.

“It’s a headwind with the government shutdown, but it’s
not as meaningful to investors as the debt ceiling,” Oliver
Pursche, co-manager of the GMG Defensive Beta Fund and president
of Suffern, New York-based Gary Goldberg Financial Services,
said in a phone interview. The firm manages about $800 million.
“Investors have grown numb to all of this and they understand
that the failure of politicians to act is being offset by
central bank actions.”

The S&P 500 rallied to a record close on Sept. 18 after the
Fed unexpectedly refrained from reducing the pace of monthly
bond buying at its last policy meeting. Economists now
anticipate the central bank will pare the size of purchases in
December, according to 59 percent of 41 economists in a Sept.
18-19 survey.

Fiscal Cliff

Last year’s debate over federal spending also weighed on
the equities market, only to be followed by a market rally in
2013. The S&P 500 dropped as much as 3.4 percent over the last
two weeks of 2012 as lawmakers wrangled over impending automatic
spending cuts and tax increases known as the fiscal cliff. It
then jumped 5 percent in January for the best start to a year
since 1997 after a last-minute budget deal was struck.

The VIX, a measure of the cost to protect against declines
in the S&P 500, jumped 7.4 percent to 16.60 today. While it also
rose during the previous two sessions, it remains on pace for
its second consecutive annual decline after retreating 6.5
percent in 2013. It closed at 15.46 at the end of last week, 24
percent below its average since 1990.

Energy producers, consumer-staples and financial stocks
fell as much as 0.7 percent, leading declines among all 10
groups in the S&P 500.

Procter & Gamble slipped 2.1 percent, the most in the Dow,
to $75.59 and Coca-Cola retreated 1.4 percent to $37.88.
Consumer-staples companies lost 1.1 percent as a group.

Energy Shares

Apple Inc. declined 1.2 percent to $476.75. The maker of
iPhones climbed 3.3 percent last week after reporting record
sales of the latest models of the smartphone in their debut
weekend.

Johnson Controls Inc. tumbled 2.4 percent to $41.50. The
auto-parts maker was cut to underweight from overweight by
Morgan Stanley analyst Ravi Shanker, who said expectations may
be too high heading into the company’s analyst day on Dec. 18.
The shares have rallied 35 percent this year.

J.C. Penney dropped 2.7 percent to $8.81. The department-store chain plummeted 30 percent last week as it began a share
offering to raise as much as $932 million and lowered its year-end liquidity forecast. J.C. Penney, which hasn’t turned a
quarterly profit since mid-2011, is down 55 percent for the
year.